City Savings & Credit Union Limited Financial Statements For the year ended December 31, 2017

Transcription

1 Financial Statements

2 Table of Contents Page Management s Responsibility Independent Auditors Report Financial Statements Statement of Financial Position 1 Statement of Income 2 Statement of Comprehensive Income 3 Statement of Changes in Members Equity 4 Statement of Cash Flows Schedule of Administrative Expenses 26

3 Management s Responsibility To the Members of City Savings & Credit Union Limited: The accompanying financial statements of City Savings & Credit Union Limited are the responsibility of management and have been approved by the Board of Directors. Management is responsible for the preparation and presentation of the accompanying financial statements, including responsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards. This responsibility includes selecting appropriate accounting policies and methods, and making decisions affecting the measurement of transactions in which objective judgment is required. In discharging its responsibilities for the integrity and fairness of the financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of financial statements. The Board of Directors is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial statements. The Audit Committee has the responsibility of meeting with management and external auditors to discuss the internal controls over the financial reporting process, auditing matters and financial reporting issues. The Audit Committee is also responsible for recommending the appointment of the Credit Union s external auditors. MNP LLP, an independent firm of Chartered Professional Accountants, is appointed by the members to audit the financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Audit Committee and management to discuss their audit findings. January 30, 2018 CEO CEO

4 Independent Auditors Report To the Members of City Savings & Credit Union Limited: We have audited the accompanying financial statements of City Savings & Credit Union Limited, which comprise the statement of financial position as at December 31, 2017, the statements of income, comprehensive income, changes in members equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly in all material respects, the financial position of City Savings & Credit Union Limited as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Mississauga, Ontario January 30, 2018 Chartered Professional Accountants Licensed Public Accountants

5 Statement of Financial Position As at December 31, 2017 Assets Cash 3,552,298 6,529,346 Investments (Note 6) 3,485,200 7,227,875 Member loans (Note 7) 36,111,156 32,694,405 Other assets (Note 8) 169, ,590 Property and equipment (Note 9) 93,155 60,167 43,411,790 46,662,383 Liabilities Member deposits (Note 10) 39,620,880 42,964,254 Other liabilities (Note 11) 117, ,977 Member shares (Note 13) 166, ,725 39,905,311 43,242,956 Commitments (Note 16, 18) Members' Equity Retained earnings 3,433,074 3,345,780 Accumulated other comprehensive income 73,405 73,647 3,506,479 3,419,427 43,411,790 46,662,383 Approved on behalf of the Board Director Director The accompanying notes form part of the financial statements 1

6 Statement of Income Interest income Loans 1,169,503 1,127,553 Investments 123, ,849 1,292,826 1,319,402 Interest expense Member deposits 332, ,362 Net interest income 960,390 1,003,040 Provision for impaired loans (Note 7) - 32,447 Net interest income after provision for impaired loans 960, ,593 Other income 159, ,477 Net interest and other income 1,119,815 1,113,070 Operating expenses Administrative expenses (Schedule) 366, ,508 Depreciation and amortization 11,359 12,241 Occupancy expenses 93,807 85,113 Salaries and benefits 545, ,415 1,016, ,277 Income before income taxes 102, ,793 Income taxes (Note 12) Current 15,588 19,157 Net income 87, ,636 The accompanying notes form part of the financial statements 2

7 Statement of Comprehensive Income Net income for the year 87, ,636 Other comprehensive income Unrealized gain (loss) on available for sale investments (242) 2,255 Income tax relating to other comprehensive income - (349) Other comprehensive income for the year, net of tax (242) 1,906 Total comprehensive income for the year 87, ,542 The accompanying notes form part of the financial statements 3

8 In $ City Savings & Credit Union Limited Statement of Changes in Members' Equity Accumulated other comprehensive income For the year ended Decemb er 31, 2017 Retained earnings Total Balance, December 31, ,741 3,238,144 3,309,885 Net income for the year - 107, ,636 Unrealized gain on available for sale investments 2,255-2,255 Income tax relating to other comprehensive income (349) - (349) Balance, December 31, ,647 3,345,780 3,419,427 Net income for the year - 87,294 87,294 Unrealized loss on available for sale investments (242) - (242) Balance, December 31, ,405 3,433,074 3,506,479 ` The accompanying notes form part of the financial statements 4

9 Statement of Cash Flows For the year ended Decemb er 31, 2017 Cash provided by (used for) the following activities Operating activities Net income for the year 87, ,636 Adjustments for: Interest revenue (1,292,826) (1,319,402) Interest expense 332, ,362 Depreciation and amortization 11,359 12,241 Income taxes expense 15,588 19,157 Interest received on member loans 1,162,243 1,128,708 Interest received on investments 125, ,840 Interest paid on member deposits (288,859) (336,049) Income taxes paid (19,506) (15,797) Net change in other assets (15,473) (40,892) Net change in other liabilities 5,949 37, , ,396 Investing activities Purchase of property and equipment (44,347) - Net change in member loans (3,409,491) (2,286,347) Net change in investments 3,739,783 6,571, ,945 4,285,224 Financing activities Net change in member deposits (3,386,951) (650,244) Net change in member shares (220) (1,800) (3,387,171) (652,044) Net change in cash during the year (2,977,048) 3,785,576 Cash - beginning of year 6,529,346 2,743,770 Cash - end of year 3,552,298 6,529,346 The accompanying notes form part of the financial statements 5

10 1. Reporting entity information City Savings & Credit Union Limited (the "Credit Union") is a financial institution incorporated in Ontario under the Credit Unions and Caisses Populaires Act, 1994 and operates in accordance with this statute and the accompanying regulations. The Credit Union is a member of Central 1 Credit Union ("Central 1") and the prescribed level of deposits are insured by the Deposit Insurance Corporation of Ontario ("DICO"). The Credit Union provides financial products and services to members throughout Ontario. The Credit Union's registered office and principal place of business is located at 6002 Yonge Street, Toronto, Ontario. 2. Basis of presentation Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board and interpretations adopted by the International Accounting Standards Board ( IASB ). The financial statements have been prepared in accordance with all IFRS issued and in effect as at December 31, These financial statements for the year ended December 31, 2017 were approved and authorized for issue by the Board of Directors on January 30, Basis of measurement The financial statements have been prepared using the historical basis except for the revaluation of certain non-current assets and financial instruments. The principal accounting policies are set out in Note 3. Functional and presentation currency These financial statements are presented in Canadian dollars, which is the Credit Union s functional currency. 3. Significant accounting policies The Credit Unions and Caisses Populaires Act, 1994 (the "Act") Regulations to the Act specify that certain items are required to be disclosed in the financial statements which are presented at annual meetings of members. It is management's opinion that the disclosures in these financial statements and notes comply, in all material respects, with the requirements of the Act. Where necessary, reasonable estimates and interpretations have been made in presenting this information. Cash Cash includes cash on hand and demand deposits. Cash flows arising from the following activities are presented on a net basis in the statement of cash flows: i) Member deposits and withdrawals from savings and investment accounts; ii) Issuance and redemption of membership shares and investments shares iii) Payment for and sale proceeds of investments; iv) Loan advances and repayments Investments Deposits Liquidity reserve and term deposits are accounted for as loans and receivables at amortized cost, adjusted to recognize other than a temporary impairment in the underlying value. Other investments Each investment is classified into one of the categories described under financial instruments. The classification dictates the accounting treatment for the carrying value and changes in that value. 6

11 3. Significant accounting policies (continued) Member loans Loans are initially recognized at their fair value and subsequently measured at amortized cost. Amortized cost is calculated as the loan s principal amount, less any allowance for estimated losses, plus accrued interest. Interest revenue is recorded on the accrual basis using the effective interest method. Loan administration fees are amortized over the term of the loan using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to the carrying amount of the financial asset. Impairment of financial assets For financial assets carried at amortized cost, the Credit Union first assesses individually whether objective evidence of impairment exists for financial assets that are significant, or collectively for financial assets that are not individually significant. If the Credit Union determines that no objective evidence of impairment exists for an individually assessed financial asset, then it includes that financial asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the loan s carrying amount and the present value of estimated future cash flows. Financial assets are considered impaired when contractual payments are in arrears in excess of 90 days, unless the loan is fully secured. Fully secured loans are classified as impaired after a delinquency period of greater than 180 days. The carrying amount of the financial asset is reduced through the use of the provision for impaired financial assets and the amount of the impairment loss is recognized in current period income. Financial assets, together with the associated provision for impairment are reported as a credit loss when there is no expectation of future recovery. Interest income is accrued until the financial asset becomes a credit loss. The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. The calculation of the present value of estimated future cash flows reflects the projected cash flows, including prepayment losses, and costs to securitize and service financial assets. For the purpose of the collective evaluation of loan impairment, financial assets are grouped on the basis of the Credit Union s internal system that considers credit risk, characteristics such as asset type, industry, geographical location, collateral, delinquency status and other relevant economic factors. Future cash flows on the group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical credit loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical credit loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year such as changes in unemployment rates, inflation, borrowing rates, property values or other factors that are indicative of incurred losses in the group and their magnitude. If, in a subsequent period, the amount of the impairment loss decreases, and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in current period income. Property and equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When components of an item of property and equipment have different useful lives, they are accounted for as separate items. Depreciation is provided using the methods and rates intended to depreciate the cost of the assets over their estimated useful lives: 7

12 3. Significant accounting policies (continued) Property and equipment (continued) Method Life/Rate Building straight-line 2.5% Furniture and equipment straight-line 7%-100% Computer equipment straight-line 20%-100% The residual value, useful life, and depreciation method applied to each class of assets are reassessed at each reporting date. Gains or losses on the disposal of property and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in current period income. Computer software Computer software, an intangible asset, is carried at cost less accumulated amortization. Amortization of computer software is amortized to the income statement on a straight-line basis over its expected useful life of 5 years. The expected useful life of computer software is reviewed on an annual basis and the useful life is altered if estimates have changed significantly. Gains or losses on the disposal of intangible assets are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in current period income. Impairment of non-financial assets At the end of each reporting period, the Credit Union reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Credit Union estimates the recoverable amount of the cash-generating units ( CGU ) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in current period income. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in current period income. Other liabilities Other liabilities include accounts payable and accrued liabilities which are initially recorded at fair value and are subsequently carried at amortized cost, which approximates fair value due to the short term nature of these liabilities. Member deposits Member deposits are initially recognized at fair value, net of transaction costs directly attributable to the issuance of the instrument, and are subsequently measured at amortized cost using the effective interest method. 8

13 3. Significant accounting policies (continued) Member shares Shares are classified as liabilities or member equity in accordance with their terms. Shares redeemable at the option of the member, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at the discretion of the Credit Union board of directors are classified as equity. Shares redeemable subject to regulatory restrictions are accounted for using the criteria set out in IFRIC 2 Members' Shares in Cooperative Entities and Similar Instruments. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Credit Union and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. Interest income is recognized in profit or loss for all financial assets measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash flows through the expected life of the financial instrument back to the net carrying amount of the financial asset. The application of the method has the effect of recognizing revenue of the financial instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. Other revenue and expenses that relate to the return on a loan or investment are incorporated into the effective interest rate and amortized to revenue over the life of the loan. Investment income is recognized as interest is earned on interest-bearing investments, and when dividends are declared on shares. Income taxes Current and deferred taxes are recognized in net income except to the extent that the tax is recognized either in other comprehensive income, or directly in equity, or the tax arises from a business combination. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities where the Credit Union operates and generates income. The calculation of current tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities generally arise where the carrying amount of an asset or liability differs from its tax base. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the assets are realized or the liabilities are settled. The calculation of deferred tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Foreign currency translation Transactions denominated in foreign currencies are translated into the functional currency of the Credit Union at exchange rates prevailing at the transaction dates. Monetary assets and liabilities are retranslated at the exchange rates at the statement of financial position date. Exchange translation gains and losses on translation or settlement are included in income. Non-monetary items that are measured at historical cost are translated using the exchange rates at the date of the transaction. 9

14 3. Significant accounting policies (continued) Financial instruments All financial instruments are initially recognized on the balance sheet at fair value. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss, available for sale, held to maturity, loans and receivables, or other financial liabilities. During the year, there has been no reclassification of financial instruments. For instruments classified as other than fair value through profit and loss, transaction costs related to the acquisition of the instrument are added to the fair value upon initial recognition. Financial instruments classified as fair value through profit or loss are measured at fair value with unrealized gains and losses recognized in net income. The Credit Union has cash and financial derivatives classified as fair value through profit or loss. Available for sale financial assets are subsequently measured at fair value with unrealized gains and losses recognized in other comprehensive income. Certain equity instruments which do not trade in an open market and whose fair value cannot be reliably measured are recorded at cost. In the period in which the asset is sold, or otherwise derecognized, the cumulative gain or loss, previously recorded in other comprehensive income, is recognized in net income. The Credit Union has equity investments that are not traded in an active market classified as available for sale (Note 6). Financial assets classified as loans and receivables are initially measured at fair value plus transaction costs, then subsequently carried at amortized cost. The Credit Union's financial instruments classified as loans and receivables include deposits with Central 1 and member loans. Financial assets classified as held to maturity are initially measured at fair value, then subsequently carried at amortized cost using the effective interest rate method. The Credit Union does not have any financial instruments classified as held to maturity. Financial instruments classified as other financial liabilities include member deposits and accounts payable and accrued liabilities. Other financial liabilities are initially measured at fair value and then subsequently carried at amortized cost. De-recognition of financial assets De-recognition of a financial asset occurs when: i) The Credit Union does not have rights to receive cash flows from the asset; ii) The Credit Union has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: a. The Credit Union has transferred substantially all the risks and rewards of the asset; or b. The Credit Union has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Credit Union has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred or retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Credit Union s continuing involvement in the asset. In that case, the Credit Union also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Credit Union has retained. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognized in income. 10

15 4. Standards and Interpretations effective in the current period and issued but not yet effective Standards and Interpretations effective in the current period The Credit Union adopted amendments to the following standards, effective January 1, Adoption of these amendments had no material effect on the Credit Union s financial statements. IAS 7 Statement of Cash Flows IAS 12 Income Taxes Standards and interpretations issued but not yet effective The Credit Union has not yet applied the following new standards, interpretations or amendments to standards that have been issued as at December 31, 2017 but are not yet effective. Unless otherwise stated, the Credit Union does not plan to early adopt any of these new or amended standards and interpretations. IFRS 9 Financial instruments The final version of IFRS 9 (2014) was issued in July 2014 as a complete standard including the requirements for classification and measurement of financial instruments, the new expected loss impairment model and the new hedge accounting model. IFRS 9 (2014) will replace IAS 39 Financial instruments: recognition and measurement. IFRS 9 (2014) is effective for reporting periods beginning on or after January 1, The Credit Union is currently assessing the impact of the standard on its financial statements. IFRS 15 Revenue from contracts with customers IFRS 15, issued in May 2014, specifies how and when entities recognize, measure, and disclose revenue. The standard supersedes all current standards dealing with revenue recognition, including IAS 11 Construction contracts, IAS 18 Revenue, IFRIC 13 Customer loyalty programmes, IFRIC 15 Agreements for the construction of real estate, IFRIC 18 Transfers of assets from customers, and SIC 31 Revenue barter transactions involving advertising services. Amendments to IFRS 15, issued in April 2016, clarify some requirements and provide additional transition relief for when an entity first applies IFRS 15. IFRS 15, and the amendments, are effective for annual periods beginning on or after January 1, The Credit Union is currently assessing the impact of this standard on its financial statements. IFRS 16 Leases IFRS 16, issued in January 2016, introduces a single lessee accounting model that requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The standard will supersede IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, The Credit Union is currently assessing the impact of this standard on its financial statements. 5. Significant accounting judgements, estimates and assumptions The preparation of the Credit Union s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. Uncertainties about these assumptions and estimates could result in outcomes that would require a material adjustment to the carrying amount of the asset or liability affected in the future. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. 11

16 5. Significant accounting judgements, estimates and assumptions (continued) Allowance for impaired loans The Credit Union has determined the likely impairment loss on loans which have not maintained the loan repayments in accordance with the loan contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances. In identifying the impairment likely from these events, the Credit Union estimates the potential impairment using the loan type, industry, geographical location, type of loan security, the length of time the loans are past due and the historical loss experience. The circumstances may vary for each loan over time, resulting in higher or lower impairment losses. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Member loans that have been assessed individually and found not to be impaired and all individually insignificant loans are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The general provision assessment takes account of data from the loan portfolio such as credit quality, delinquency, historical performance and industry economic outlook. Financial instruments not traded on active markets For financial instruments not traded in active markets, fair values are determined using valuation techniques such as the discounted cash flow model that rely on assumptions that are based on observable active markets or rates. Certain assumptions take into consideration liquidity risk, credit risk and volatility. 6. Investments Loans and receivables Central 1 - deposits Liquidity reserve deposit 2,633,640 2,756,727 Term deposits - 3,000,000 Concentra Trust term deposits - 500,000 Accrued interest 6,994 9,644 2,640,634 6,266,371 Available for sale Central 1 Class A shares 170, ,501 Central 1 Class E shares 169, ,300 Concentra Financial Services Association Class D shares 500, ,000 CUCO Cooperative Association Class B shares 2,898 96,703 Investments in other co-operatives 1,000 1,000 Central 1 Credit Union liquidity reserve deposit 844, ,504 3,485,200 7,227,875 As a condition of maintaining membership in Central 1 in good standing, the Credit Union is required to maintain on deposit in Central 1 an amount equal to 6% of the Credit Union's total assets updated at each month end. The liquidity reserve deposit bears interest at a rate which is fixed periodically and is callable by the Credit Union on ninety days notice. 12

17 7. Member loans In $ Principal Performing Principal Impaired Allowance Specific Allowance Collective 2017 Mortgages 34,243, ,243,503 Personal 1,856,400 7,411 - (20,000) 1,843,811 Accrued interest 23, ,842 36,123,745 7,411 - (20,000) 36,111,156 Principal Performing Principal Impaired Allowance Specific Allowance Collective 2016 Mortgages 30,576, ,576,804 Personal 2,121, (20,000) 2,101,019 Accrued interest 16, ,582 32,714, (20,000) 32,694,405 The loan classifications set out above are as defined in the regulations to the Act. Mortgage loans are repayable in blended principal and interest installments, over a maximum term of five years based on a maximum amortization period of thirty years. Closed mortgage loans are drawn for a period of six months to five years. Mortgages are open to prepayments to a maximum of 20% of the original principal balance annually. Mortgage backed lines of credit are repayable on a revolving credit basis and require minimum monthly payments. Personal loans are repayable in blended principal and interest installments, over a maximum amortization period of ten years. Line of credit loans are repayable on a revolving credit basis and require minimum monthly payments. Personal loans are open and may be repaid at any time without notice. Loan allowance details Balance, beginning of year 20,000 20,000 Provision for impaired loans - 32,447 20,000 52,447 Less: accounts written off - (32,447) Balance, end of year 20,000 20,000 Loans past due but not impaired A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying value of loans at year-end that are past due but not classified as impaired because they are either less than 90 days past due, or fully secured and less than 180 days past due, and collection efforts are reasonably expected to result in repayment. 13

18 7. Member loans (continued) In $ 1-30 days days days 91 days and greater 2017 Mortgages 328, ,121 Personal 8, , , ,998 In $ 1-30 days days days 91 days and greater 2016 Mortgages 954, ,137 Personal 74, ,389 1,028, ,028,526 The principal collateral and other credit enhancements the Credit Union holds as security for loans include (i) insurance, mortgages over residential lots and properties, and (ii) recourse to liquid assets, guarantees and securities. Valuations of collateral are updated periodically depending on the nature of the collateral. The Credit Union has policies in place to monitor the existence of undesirable concentration in the collateral supporting its credit exposure. In management s estimation, the fair value of the collateral is sufficient to offset the risk of loss on the loans past due but not impaired. 8. Other assets Prepaid expenses 86,996 81,910 Index-linked derivative contracts (Note 10) 67,517 55,444 Deferred income taxes (Note 12) 11,550 11,550 Income taxes recoverable 3,918 1, , ,590 14

19 9. Property and equipment In $ Land Building Furniture and equipment Computer equipment Cost Opening balance 26, , , , ,715 Additions - 40,511 3,836-44, Total 26, , , , ,062 Accumulated depreciation Opening balance - (172,438) (289,361) (144,749) (606,548) Depreciation - (2,701) (2,946) (5,712) (11,359) - (175,139) (292,307) (150,461) (617,907) Net book value at December 31, ,650 37,810 15,707 12,988 93,155 In $ Land Building Furniture and equipment Computer equipment Cost Opening balance 26, , , , ,715 Additions Total 26, , , , ,715 Accumulated depreciation Opening balance - (172,438) (286,547) (136,734) (595,719) Depreciation - - (2,814) (8,015) (10,829) - (172,438) (289,361) (144,749) (606,548) Net book value at December 31, ,650-14,817 18,700 60, Member deposits Chequing 7,181,709 12,264,329 Savings 10,463,452 11,608,633 Term deposits 12,779,615 10,282,143 Registered retirement savings plans 4,990,713 5,045,843 Registered income funds 2,452,379 2,391,947 Registered tax free savings accounts 1,594,768 1,256,692 39,462,636 42,849,587 Accrued interest 158, ,667 39,620,880 42,964,254 15

20 10. Member deposits (continued) Registered plans Concentra Trust is the trustee of the registered plans offered to the members. Under an agreement with the trust company, members' contributions to these plans, as well as income earned on them, are deposited in the Credit Union. On withdrawal, payment of the plan proceeds is made to the members or their designates, by the Credit Union on behalf of the trust company. Index-linked deposits The Credit Union has issued and outstanding $947,427 ( $956,687) of index-linked products included in registered retirement savings plans, term deposits and registered tax free savings accounts. These deposits have maturities of 3 and 5 years and pay interest to the depositors, at the end of the respective terms, based on the performance of the S&P / TSX 60 Index. The index-linked agreements between the Credit Union and the depositors are separated from the carrying value of the deposits. These derivative financial instruments are carried at fair value and are included in other liabilities. The member deposits are recorded at discounts that accrete through interest expense to their par value over the terms of the deposits. As at year end, the amount of the discount included in member deposits is $20,750 ( $23,003). The Credit Union has acquired offsetting derivative agreements with Central 1 of an equivalent term and notional amount, whereby in return for a fixed amount at origination, Central 1 will pay the Credit Union an amount equal to the return of the S&P / TSX 60 Index over the term of the agreement applied to the notional amount. These agreements are used to hedge the Credit Union s exposure to changes in the underlying index created by the index-linked member deposits. The agreements are carried at fair value and are carried in other assets. 11. Other liabilities Accounts payable and accrued liabilities 50,409 56,533 Index-linked derivative contracts (Note 10) 67,517 55, Income tax 117, ,977 The total provision for income taxes is at a rate below the combined federal and provincial statutory income tax rates for the following reasons: Combined federal and provincial statutory income tax rates 26.5% 26.5% Rate reduction for credit unions -11.5% -11.5% Other 0.1% 0.1% 15.1% 15.1% The tax effects of temporary differences which give rise to the deferred tax asset are from differences between amounts deducted for accounting and income tax purposes. The net deferred income tax asset is comprised of the following: 16

21 12. Income tax (continued) Deferred tax asset (Note 8 ) Property and equipment 11,240 11,240 Allowance for impaired loans Member shares 11,550 11,550 As a condition of membership, each member must hold a minimum of 20 membership shares with an issue price of $5 each. As at December 31, 2017, there were 1,612 members (2016 1,620). Shares are redeemable on withdrawal from membership, subject to the Credit Union meeting capital adequacy requirements. 14. Capital management The Credit Union is subject to the capital requirements set out in the Act. The Act prescribes capital adequacy measures and minimum capital requirements. The Credit Union must comply with a leverage ratio of eligible capital to total assets. The Act also requires a risk weighted asset calculation for credit and operational risk. Under this approach, credit unions are required to measure capital adequacy in accordance with instructions for determining risk adjusted capital and risk weighted assets, including off balance sheet commitments. Based on the prescribed risk of each type of asset, a weighting of 0% to 150% is assigned. The ratio of eligible capital to risk weighted assets is calculated and compared to the standard outlined by the Act. Tier 1 capital is defined as a credit union's primary capital and comprises the highest quality of capital elements while Tier 2 is secondary capital and falls short of meeting Tier 1 requirements for permanence or freedom from mandatory charge. Tier 1 capital at the Credit Union includes retained earnings and membership shares. Tier 2 capital of the Credit Union includes eligible accumulated other comprehensive income and the collective allowance for credit losses to a maximum of 1.25% of risk weighted assets. For eligible capital purposes, Tier 2 capital cannot exceed Tier 1 capital. The Credit Union has adopted a capital plan that conforms to the capital framework and is regularly reviewed and approved by the Board of Directors. The following table compares the Act's regulatory standards to the Credit Union's board policy for the year: Regulatory standards Policy standards Leverage ratio 4% 6.5 % Risk-weighted assets ratio 8% 12 % As at December 31, 2017, the Credit Union is in compliance with the minimum statutory requirements for eligible capital. Total regulatory capital is comprised of Tier 1 and Tier 2 capital as follows: 17

22 14. Capital management (continued) Tier 1 capital Member shares 166, ,725 Retained earnings 3,433,074 3,345,780 3,599,579 3,512,505 Tier 2 capital Collective allowance 20,000 20,000 Eligible accumulated other comprehensive income - equity investments 73,405 73,647 93,405 93,647 Total eligible capital 3,692,984 3,606,152 Capital Tests Total eligible capital to total assets 8.5% 7.7% Total eligible capital to risk-weighted assets 24.2% 25.7% Capital management is the process whereby the level of capital is determined to support operations, risks and growth. The Credit Union uses various management processes to manage capital risk. A capital management framework is included in policies and procedures established by the Board of Directors. In addition, the Act establishes standards to which the Credit Union must comply. The primary capital policies and procedures include the following: i. Adhere to regulatory capital requirements as minimum benchmarks (such as growth, operations, enterprise risk); ii. Co-ordinate strategic risk management and capital management; iii. Develop financial performance targets/budgets/goals; iv. Administer a patronage program that is consistent with capital requirements; v. Administer an employee incentive program that is consistent with capital requirements; vi. Develop a planned growth strategy that is coordinated with capital growth; and vii. Update plans that consider the strengths, weaknesses, opportunities and threats to the Credit Union. 15. Related party transactions Related parties include the key management personnel ("KMP") which incorporates senior management and directors of the credit union as well as each of their spouses, their children and any entities they control. Management of the credit union are the Chief Executive Officer, Operations Manager, and Credit Officer. Loans made to related parties are approved under the same lending criteria applicable to all members and under substantially the same terms and conditions as with other members. There are no loans that are impaired in relation to loan balances with related parties. The following table reflects balances with related parties at year end and the value of interest income and expenses recorded in relation to them during the year. 18

23 15. Related party transactions (continued) Member loans to related parties at the year end: Loans 1,380,950 1,393,476 Approved but unadvanced lines of credit 17, ,679 1,398,500 1,699,155 Member deposits from related parties at the year end: Chequing and savings deposits 144, ,657 Term deposits 1,000 - Registered plans 77,834 40,839 Member shares 1,400 1, , ,496 Interest income and expense recorded with related parties: Interest and other revenue earned on loans 28,335 26,820 Interest paid on deposits Aggregate compensation of KMP during the year consisted of: ln $ Salaries and short-term benefits 264, ,117 Board honoraria amounted to $13,350 ( $7,400) and other board and sub-committee expenses totalled $9,100 ( $6,850) for the year. These transactions were made in the normal course of business and are measured at the exchange amount, which is the consideration established and agreed to by the related parties. 19

24 16. Financial instrument risk management The Credit Union, as part of its operations, carries a number of financial instruments which result in exposure to the following risks: credit risk, market risk and liquidity risk. The Credit Union has established avoidance of undue concentrations of risk, hedging of risk exposures, and requirements for collateral to mitigate credit risk as risk management objectives. In seeking to meet these objectives, the Credit Union follows a risk management policy approved by its Board of Directors. The Credit Union's risk management policies and procedures include the following: i. Ensure all activities are consistent with the mission, vision and values of the Credit Union; ii. Balance risk and return; iii. Manage credit, market and liquidity risk through preventative and detective controls; iv. Ensure credit quality is maintained; v. Ensure credit, market, and liquidity risk is maintained at acceptable levels; vi. Diversify risk in transactions, member relationships and loan portfolios; vii. Price according to risk taken; and viii. Using consistent credit risk exposure tools. In addition to the Board of Directors, the Audit Committee is involved in financial instrument risk management oversight. There have been no significant changes from the previous year in the exposure to financial instrument risks nor the Credit Union s policies, procedures and methods used to measure and manage those risks. Credit risk Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Credit Union. Credit risk primarily arises from loans receivable. Management and the Board of Directors review and update the credit risk policy at least annually. The Credit Union's maximum credit risk exposure, before taking into account any collateral held, is the carrying amount of loans as disclosed on the statement of financial position. Concentration of credit risk exists if a number of borrowers are engaged in similar economic activities or are located in the same geographical region, and indicate the relative sensitivity of the Credit Union's performance to developments affecting a particular segment of borrowers or geographical region. Geographical risk exists for the Credit Union due to its primary service area being the greater Toronto area. Credit risk management The Credit Union uses a risk management process for its credit portfolio. The risk management process starts at the time of a member credit application and continues until the loan is fully repaid. Management of credit risk is established in policies and procedures by the Board of Directors. The primary credit risk management policies and procedures include the following: i. Loan security requirements; ii. Security valuation processes, including method used to determine the value of real property and personal property when that property is subject to a mortgage or other charge; iii. Maximum loan to value ratios where a mortgage or other charge on real or personal property is taken as security; iv. Borrowing member capacity (repayment ability) requirements; v. Borrowing member character requirements; vi. Limits on aggregate credit exposure per individual and/or related parties; vii. Limits on concentration to credit risk by loan type, industry and economic sector; viii. Limits on types of credit facilities and services offered; ix. Internal loan approval processes; x. loan documentation standards; xi. Loan re-negotiation, extension and renewal processes; xii. Processes that identify adverse situations and trends, including risks associated with economic, geographic and industry sectors; xiii. Control and monitoring processes including portfolio risk identification and delinquency tolerances; xiv. Timely loan analysis processes to identify, assess and manage delinquent and impaired loans; xv. Collection processes that include action plans for deteriorating loans; and xvi. Overdraft control and administration processes. 20